Reviewing the ARK Venture Fund Portfolio

Our recent piece on a blockchain-powered VC fund talked about how investing in startups provides exposure that’s not correlated to the movements of the broader stock market. Venture capital as an alternative asset class provides portfolio diversification which reduces risk. For retail investors, that’s been rather problematic because venture funds don’t just take investments from whoever knocks on their door. Secondary markets like EquityZen or Forge do, but usually require investors to be accredited, or mandate prohibitively high minimum amounts. Investing $100,000 USD to have a portfolio of ten startups where nine are expected to fail isn’t an option for most retail investors. That’s why we were particularly excited to see ARK Invest has launched a venture fund portfolio.

For the first time ever, we’re bringing venture capital to everyone. Handpicked by the legendary Cathie Wood.

Credit: Titan

The ARK Venture Fund Portfolio

Three clicks into the email announcing the launch of ARK’s fund and we’re already at a signup page that takes three minutes to complete. Walk down that path and soon you’ll be able to invest the fund minimum – $500 – in the ARK Venture Fund Portfolio using an app called Titan which also offers other alternative investment options such as a private credit fund from Carlyle, or a real estate fund from Apollo.

As of May 2022, Titan has over $750 million in assets under management and more than 60,000 users
with an average account size of $12,500.

Credit: ARK Invest

With venture backing from names like Andreesen Horowitz, and vetting by ARK Invest, we can safely assume that any systemic risk relating to Titan’s platform will be minimal.

The big question is what exposure this fund will offer retail investors, and we don’t know much about that yet. In the collateral, we’re told that target assets will include predominantly late-stage private companies, public companies, and possibly early-stage venture capital funds. We’ve never looked favorably upon fund-of-funds offerings because we don’t like being double taxed, though ARK doesn’t say much about what those allocations might look like as a percentage of the total fund. They do talk about public companies being a meaningful part of the fund which raises some concerns.

Investing in Public and Private Companies

ARK’s decision to include public companies (15 to 30 holdings) in the fund detracts from the appeal of being a pure play way to invest in startups. The correlation of this fund to the equity markets increases as they add publicly traded companies, and this erodes the diversification effect we’re looking for. ARK addresses this in a short video talking about why the fund will also dabble in stocks (our comments in italics).

• There may be periods where valuations are at odds. Capitalize on these disparities and capitalize on arbitrage opportunities. This is similar to how we compared the valuation of SPACs to the last private funding round. At the end of the day, it’s still investing in assets that are correlated to the broader equity markets.
• Can hold shares throughout lifecycle and benefit from valuation throughout life. What it says on the tin. Not a perk from where we’re sitting.
• Use some public companies for quarterly redemptions so that we can offer liquidity. This reason is different from the others and points to challenges that the fund faces holding illiquid shares of startups.

We’re told the new fund plans to hold 15-30 public companies and invest in 25+ private companies per year, but what matters are the respective weightings of these two asset classes. As for fees, investors will pay a fixed 4.22% annually which ARK proposes is a better alternative to the typical “2 and 20 structure” used by most venture capital funds.

We’ve cautioned readers to avoid equity crowdfunding like the plague because there is no secondary market. That’s one problem, the other being that companies with no VC backing haven’t been vetted by expert investors, and aren’t being pushed to seek out an exit in a reasonable time frame. That’s not a problem for ARK’s portfolio constituents because they’re all being backed by notable venture capital firms, and come with Cathie Wood’s blessing. ARK will disclose companies and weightings on October 3rd for the first time, but in the meantime we’re given the names of five portfolio investments made in September 2022, presumably, at or around the valuation ascribed during the most recent round for each startup.

ARK’s Initial Portfolio Holdings

Flexport

Perhaps the most exciting of the group, Flexport, is a firm we covered just over five years ago in a piece titled International Freight Forwarding Software from Flexport. To date, Flexport has taken in $2.2 billion in funding from a long list of names like Andreessen Horowitz, Softbank, and Wells Fargo. The most recent round – a $935 million Series E that closed earlier this year – valued the company at $8 billion which means ARK is coming in at a later stage. That’s in line with their stated goal – late-stage private opportunities should represent 50-80% of the fund.

Flexport moved $19B in gross merchandise value in 2021 for clients across 112 countries which represents about a 0.3% market share in the global market for freight forwarders. Revenues came in at $660 million with a gross margin of 20%. That’s according to private markets research firm Sacra which produced the below chart showing the company’s strong consistent revenue growth over time.

Another firm in ARK’s fund we’ve looked at before is Freenome.

Freenome

Several years back, Freenome was on our list of 9 Genomics Startups for Investors to Watch. So far, the company has raised $1.1 billion in funding from investors such as Roche, Novartis, Google, and Fidelity with the last round – a $290 million corporate round led by Roche earlier this year – valuing the company at $2.62 billion (according to the CB Insights unicorn list). Illumina defines three broad categories of cancer blood testing – screening, therapy selection, and monitoring – and lists Freenome as competing in the first category.

Epic Games

The last time we mentioned Epic Games was in an article titled Unity Technologies Stock: A Pure Play on the Metaverse. Here’s what we said:

It’s estimated that more than 2.5 billion people play games based on the Unity engine, putting it on par with the 2.9 billion people who scroll Facebook, which lost about $10 billion on the metaverse last year. 

While the social media giant’s deep pockets are a concern over the long term, a more immediate challenge to Unity Technologies is the Unreal Engine from Epic Games, a private company currently valued at $42 billion. In a future article, we’ll look at the startup behind Fortnite and whether the metaverse is epic enough for both companies.

We haven’t gotten around to that yet, but we may look to examine Epic Games in the context of how it might impact our current position in Unity Software (U). Stay tuned.

Chipper Cash

We’ve recently began looking into fintech stocks that allow exposure to emerging markets such as StoneCo (STNE) and Nubank (NU). As we type this, one of our analysts is digging into DLocal, a firm that offers payments solutions in emerging markets. Chipper Cash focuses on the great country of Africa. Just kidding, we always make that joke because most people don’t know that Africa is a continent containing 54 countries – mostly frontier markets – which offers a great deal of opportunity for fintech firms, provided they can navigate the intricacies of operating within dictatorships (half of the countries in Africa are classified as such). The below key metrics hint at a fintech offering that goes beyond just remittances.

Chipper has taken in just over $302 million in funding with the last round – a Series C extension round of $150 million which closed in November 2021 – valuing the company at $2 billion.

MosaicML

Not much information is available about MosaicML, perhaps because they only exited stealth mode a year ago. An article by HPC covered the event noting that MosaicML had raised $37 million. Software eats the world, so it’s no surprise that it helps eat into the time it takes for neural networks to be trained which reduces costs – by up to 7X we’re told. The founder, Naveen Rao, previously sold his AI chip startup Nervana to Intel back in 2016, then left the company in 2020.

ARK’s Venture Fund – Are We Buying It?

The big stand out for ARK’s offering is accessibility, starting with the fact that most unaccredited investors can participate (unfortunately it’s not open to international investors). Below you can see just how few investors are accredited in the United States.

Liquidity is good to have, but we’d sacrifice that in exchange for ARK only investing in startups. There’s no indication of how overweight their equity exposure might become as they figure out how this liquidity function operates with a new type of fund that’s never been tried before (that we’re aware of).

The selection of constituents seems good so far, but we’re only told five names when the fund plans to hold 25. How they report the changes in valuations, details around exits, and company updates will be interesting to see. Investors can request redemptions on a quarterly basis with up to 5% of the fund’s total assets eligible for redemption every quarter. If the total amount of redemptions requested exceeds available allocations, everyone just gets a proportion of their request.

This isn’t much of a perk for those who don’t care about liquidity, but it raises some questions around the life of the fund. When there are exits, that cash goes back into the pool which is then used to make more investments. Fund closure is at management’s discretion at which time investors would receive whatever money they’re entitled to back in its entirety.

We’ll keep an eye on the app to see how the portfolio composition evolves over time and perhaps cover some of the other alternative asset funds being offered on the Titan platform alongside the ARK Venture Fund Portfolio.

Conclusion

Investing in notable disruptive tech startups alongside venture capital firms in a fund that’s managed by ARK Invest is a compelling value proposition. Investing in public companies as part of that fund, not so much. ARK’s brand will allow them access to marque names that others might not be able to access, and we’ll need to wait to see which companies they’ll be investing in aside from the five discussed in this piece. Venture capital is an alternative asset class we’d like some exposure to, and the ARK Venture Fund certainly looks promising.

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